The Australian property sector faces the mass exodus of foreign banking credit. The consequent risk of a needless fire sale of commercially viable residential and non-residential property assets is clear and quantifiable.
A fire sale of property assets would harm the rest of the economy, as it would inevitably constrain general bank lending to home buyers and SMEs.
The Rudd Government plans to establish a contingency fund to address this risk, called the Australian Business Investment Partnership (ABIP).
The fund could bridge gaps left where banks, particularly foreign banks, withdraw from syndicated loan facilities.
The $4 billion fund (which can expand to $30 billion):
- Targets roll-over finance for existing buildings and projects already under construction
- Is limited to re-financing loans on commercial terms where the withdrawal by a syndicate participant threatens the refinancing of the loan
- Is limited to commercially sound projects and companies.
The case for ABIP – in brief
1. The property sector has a huge exposure to foreign financiers – there is more than $30 billion of foreign credit in the property market and more than 70 percent of syndicated loans are controlled by foreign banks.
2. Several foreign banks have already refused to rollover existing credit lines for commercially viable projects and assets.
3. Foreign banks are under massive political pressure to re-focus on their domestic markets – most of them are partially nationalised and are controlled by foreign politicians.
4. Where foreign banks refuse to refresh existing credit lines, many property owners and developers will be forced to unnecessarily liquidate commercially sound assets.
5. The retreat of foreign banks increases the risk of an artificial fire sale that could engulf all property asset prices.
6. A meltdown would also harm the general business community, which relies on property as a security for both operating and investment finance.
7. An artificial collapse of commercial property values would also squeeze the credit available to home buyers. \
8. Credit rationing would also needlessly delay the cyclical recovery of residential and non-residential property investment activity.
9. The bottom line would be less new investment, slower economic growth and higher job losses.
10. A contingency fund is needed to address the exit of foreign funds caused by factors totally extraneous to the fundamentals of the Australian economy and its property markets.
ABIP won’t artificially prop up property values. It is designed to stop a free-falling over-correction of values. The Australian property market is already re-pricing itself. Capital values should find their new level in terms of market fundamentals, not a liquidity shock caused by political forces and priorities in other countries.
As ABIP loans will be made against new valuations and as commercial rates of interest will be charged, there is no free ride or bail out. This also means there is no reason for taxpayers to be “out of pocket”.
ABIP will safeguard existing construction projects and jobs in both the residential and commercial property sectors, which are already under major stress. The exodus of foreign banks would break the back of the construction industry.
- 15,000 construction jobs have already been lost since August last year.
- More than 90 percent of these construction workers are employed by small businesses.
- Property companies are shedding around 10 percent of their staff. The trades and professions, such as architects, are heading for job losses of 20 percent.
- $109 billion of construction projects were shelved in 2008 – nearly eight times the historical average.
- Development approvals are down 37 percent for new residential projects and 44 percent for non-residential projects (compared to December 2007 levels).
- Failing to implement ABIP risks decimating the nation’s property and construction skills base – a re-run of the early 1990s.
Property owners and financiers are keen to invest in new development activity (and to create jobs). However, they cannot do so unless finance for their existing projects and existing assets is safeguarded.
There is a direct link between the availability of ABIP gap-funding and the uninterrupted supply of new homes. That's because institutional developers – the fastest growing segment of the quality residential market and of master-planned communities – face the greatest exposure to foreign lenders.
Real estate also provides the collateral for the broader Australian economy. The Australian Chamber of Commerce and Industry has said that the withdrawal of foreign bank lending would cause instability and undermine confidence that would spread to small businesses that borrow against their property holdings. An artificial property fire sale would further tighten the screws on lending to SMEs and could tip Australia into a recession as deep as the UK and US markets.
The time to act is now. Some foreign banks have already fled for the exit gates. In a recent example, four out of 13 banks withdrew from a syndicate re-financing of an ASX-listed property company.
This exodus is likely to accelerate over the coming months, which is why it’s strategically smart to establish a contingency fund now, rather than wait until it’s too late.
Have your say.
Peter Verwer |
Tuesday, 3 March 2009 6:00 AM |
2 Comments
